Risk for Price : Using Generalized Demand System for Asset Pricing

I construct a non-parametric pricing kernel with consumption prices and expenditure by decomposing consumer's indirect utility function. This pricing kernel establishes the fundamental connection between the inter-temporal financial asset-holding and the intra-temporal consumption portfolio. I examine the pricing kernel in explaining variation of expected returns across diverse equity portfolios. This pricing kernel is more successful than traded-factor models and simple consumption-based models. Allowing the generalized non-homothetic preference, I find the price of good requires relatively greater risk compensation in the good-service two-sector economy. Dissecting the risk premium of expenditure and the risk premium of relative good price, I show that shrinking expenditure share in the good sector helps explain the structural transformation of risk premium